Correspondent's Choice

This story about an IMF warning about austerity measures was published by EurActiv on 22nd July 2010.

The current drive to cut government debt and spending in the euro zone could reduce the region’s economic growth in the coming years, the International Monetary Fund said yesterday (21 July).

The IMF’s European Department published a report on the euro zone after talks with the European Commission and the European Central Bank.

It warned that further economic problems could not be ruled out, said the euro’s heavy slump since the start of the year had reduced it to roughly the right level, while record low 1% ECB interest rates should be kept in place to aid the recovery.

“Weakened confidence and the drag from fiscal adjustment – accelerated in some parts of the euro area – will be only partly offset by the recent depreciation of the euro, which is now broadly in line with fundamentals,” the report said.

The euro zone was also at risk of suffering a credit crunch, with high-debt countries Greece, Italy, Portugal and Spain most in danger due the amount of people employed by small and medium-sized firms, who may struggle to borrow.

“Constrained bank loan supply could weigh heavily on the recovery of the euro-area economy,” the report said.

Spending cuts by eurozone countries in a bid to rectify debt problems could also hit growth. While a rebound in confidence might soften the blow, on the whole private consumption was “not likely to contribute substantially to growth until late 2011”.

“In countries where fiscal credibility is being questioned, front-loaded consolidation would inevitably dampen demand in the short run,” it added.

Shock waves from the sovereign debt crisis were the biggest danger.

It warned that “a sharp weakening of growth in the second half of 2010 would occur” if the recent plunge in business confidence becomes entrenched, while “the nascent recovery, driven mainly by external demand, is likely to be slowed in the near term by market tensions related to sovereign risks”.

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